Markets are expecting that the U.S. annual inflation report for June will come in at 8.8 percent, up from 8.6 percent in May. On a monthly basis, the CPI is poised to edge up by 1.1 percent. The core inflation rate, which removes the volatile food and energy sectors, is anticipated to ease to 5.7 percent.
According to an administration memo, authored by National Economic Council (NEC) director Brian Deese and Council of Economic Advisors (CEA) chair Cecilia Rouse, the effects of soaring energy and food costs on the headline CPI figure in June will reach 40 percent. This, the memo states, has been largely driven by Russia’s war in Ukraine.
But U.S. officials note that the June CPI is a lagging indicator since it does not consist of the drop in crude oil and gas prices.
“Energy prices have fallen significantly from the prices included in the June CPI report, and are expected to fall further,” the memo stated. “The June CPI data will largely not reflect the substantial declines in gas prices we’ve seen since the middle of June.”
West Texas Intermediate (WTI) crude prices have plunged 19 percent over the last month, falling below $97 a barrel on the New York Mercantile Exchange. Gasoline prices have fallen 7 percent in the same span, declining from a national average of $5.01 a gallon to $4.655 as of Tuesday, American Automobile Association (AAA) data show.
“The President has been clear that elevated inflation also seen around the world has created a hardship for American families, and addressing it is his top economic priority,” the document stated. “Inflation remains elevated throughout the world, with inflation at 7.7% in Canada, 8.6% in the Euro zone, and 9.1% in the United Kingdom. While the war in Ukraine is driving up inflation in energy and food throughout the globe, core inflation—inflation outside of food and energy—has increased around the world as well.”
No Recession Signs
With growing concerns about a recession, the White House noted that the latest economic data, including the better-than-expected June jobs report, “are not consistent with a recession in the first or second quarter.” Officials added that the nation’s labor market is strong enough that it can allow the economy to shift into a phase of lower inflation and steady growth.
At the same time, Deese and Rouse conceded that the United States would transition to a period of slower economic growth and lower job creation.
But multiple measures can be employed to accelerate price stability efforts and ensure the U.S. economy can continue to grow, including passing “legislation that lowers costs for families” and reducing the federal budget deficit, the White House averred.
In the first quarter, the U.S. economy contracted 1.6 percent. Many investment firms and economists have raised the odds of a recession within the next two years. However, the Federal Reserve Bank of Atlanta’s GDPNow estimate shows that the economy might already be in a recession, as the model suggests the second-quarter growth rate was -1.2 percent.
Speaking to reporters on Monday, White House press secretary Karine Jean-Pierre said that June inflation rate is expected “to be highly elevated” but she also downplayed the data, explaining that it is “out of date” and “backwards-looking.”
While the administration is optimistic about surging prices, consumers’ inflation expectations over the next year hit record highs.
The one-year outlook for inflation climbed to 6.8 percent in June, up 0.2 percent in May, according to the Federal Reserve Bank of New York’s (FRBNY) Survey of Consumer Expectations.
In addition, the mean probability that the unemployment rate will be higher next year climbed to 40.4 percent. This is the highest level since April 2020.
Some market analysts think that U.S. inflation might have peaked in June due to lower consumer spending. In April and May, consumer spending rose just 0.6 percent and 0.2 percent, respectively. Economists polled by Reuters predict that consumer spending would jump 0.4 percent in June.
Yardeni Research agrees that inflationary pressures might ease next month as the commodities market, from agriculture to energy, is “showing significant declines so far during July.”
In a research note on Tuesday, Deutsche Bank analysts purport that inflation is largely a demand-driven event.
“Over the last year, we have seen a clear mix-shift in terms of the drivers of inflation. In terms of the latest year-over-year rate, about 1/3 of both headline and core PCE [personal consumption expenditure] inflation can be attributed to supply side inflation versus the remaining 2/3 coming from demand driven components,” the bank wrote.
But the United States may not be out of the woods yet, warns Richmond Fed Bank President Tom Barkin. He told the Rotary Club of Charlotte that he expects plenty of volatility in inflation before it settles down.
Still, fresh U.S. inflation numbers are expected to keep the central bank on its hawkish tightening path. The Federal Open Market Committee (FOMC) will pull the trigger on another 75-basis-point hike to the benchmark Fed funds rate. Markets are betting that the rate-setting Committee will agree to a half-point increase in September, according to the CME FedWatch Tool.